Dollar probes new euro lows, slips vs. sterling

But doubts about Japan's economy keep greenback steady vs. yen

By

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar was down against the euro after sinking to a new record low earlier Tuesday, as investors weighed ongoing credit woes and surging crude-oil futures as they awaited Thursday's European Central Bank interest rate decision.

"There was nothing on the economic calendar to drive trade, and the backdrop of U.S. growth uncertainties, the credit crisis, and a volatile equity market remained the drivers on Tuesday. The path of least resistance remains down for the dollar, and a continued slow-bleed looks to be in place for now," wrote analysts at Action Economics.

The ECB is widely expected to hold its benchmark steady at 4%, whereas some analysts and investors believe that ongoing credit woes will prompt the U.S. Federal Reserve to cut its federal funds rate again in December from its current 4.5%. Lower interest rates pressure the dollar, as they erode the returns on dollar-denominated assets.

The euro was trading at $1.4555 after earlier rising to $1.4571, its highest level since the united European currency began trading in January 1999. It was at $1.4469 in late U.S. trading Monday.

The euro's record high would be equal to 1.3423 deutschmarks, supplanting the German currency's all-time peak of 1.345 hit on March 8, 1995, according to Ried Thunberg ICAP.

"I expect to see the dollar continue to lose ground against the euro for the balance of this week. So far we have not seen any real panic selling come into the market, but that could all change as early as this weekend," said Adam Hewison, president of INO.com, a technical analysis Web site.

"If we see the euro breaking into new high ground on Friday it would not be a surprise to witness a panic attack on the dollar early next week as international investors start to flee," Hewison predicted.

BOE also on deck

The Bank of England is also expected to leave its benchmark rate unchanged Thursday at 5.75%.

"We continue to suggest that if there is to be a surprise this week from central bank meetings, the most likely candidate is the BOE, which in the recent past seemed to almost take pride in its willingness to surprise the market," wrote currency strategists at Brown Brothers Harriman.

"Yet the most likely scenario is for the BOE -- and the ECB -- to remain on hold," they added.

The pound sterling was trading at $2.0875 after earlier rising to a 26-year high of $2.0907. It was at $2.0806 Monday.

Pressured by the euro gains, the dollar index, which measures the greenback against a basket of six major currencies, slipped under the 76-level for the first time since the metric was compiled in 1973.

The index was down about 0.6% at 76.030, compared with 76.435 Monday.

U.S. stocks closed higher after a volatile session in which they wavered between positive and negative territory. See Market Snapshot.

Crude-oil futures rallied nearly 3% to end up $2.72 at $96.70 a barrel on the New York Mercantile Exchange. Earlier, crude hit a new intraday record high of $97, boosted by expectations for a drop in crude inventories and dollar weakness. See Futures Movers.

Gold futures rose $12.60 to end at $823.40 an ounce. Earlier, the contract reached an intraday high of $828, a level not seen since 1980. See Metals Stocks.

Surging oil and gold bolstered commodity-linked currencies.

The dollar was trading at C$0.9214 against the Canadian dollar, or loonie, after falling as low as C$0.9207 earlier -- a new modern-day high. The currency pair last traded around such levels in the mid-1800s, making exact comparisons impossible.

The Australian dollar was buying $0.9284, up from a low of $0.9206 earlier Tuesday.

On Wednesday, the Reserve Bank of Australia is expected to raise its official cash rate by a quarter-percentage point to 6.75%.

"A hawkish statement would maintain the upward pressure, but given that the market was well-priced for a hike, it likely won't fuel a move to the recent high of $0.9343," wrote David Watt, senior currency strategist at RBC Capital Markets.

Yen under pressure

Japanese government data Tuesday kept pressure on the yen.

The dollar was buying 114.68 yen, up from 114.53 yen in late U.S. trading Monday.

Japan's index of leading economic indicators hit zero in September, the first time in nearly a decade that all of the 10 indicators used to compile the data have pointed to a contraction. The index is considered a predictor of economic activity over the next half year.

The gloomy reading added to evidence that the Bank of Japan will have to refrain from hiking interest rates this year.

Japan's 0.5% benchmark is the lowest in the developed world, making it a popular currency for carry trades, in which investors borrow lower-yielding currencies and invest them in higher-yielding assets.

Political uncertainty also weighed on the yen. Democratic Party of Japan President Ichiro Ozawa on Tuesday retracted his resignation and agreed to remain at the helm of the country's largest opposition party.

Ozawa had said Sunday that he was packing his bags to take responsibility for the confusion he caused by agreeing to consider a power-sharing framework with the Liberal Democratic Party.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.